by Julie Corbo

Most companies invest considerable time and money performing financial and legal due diligence of target companies, but fail when it comes to human capital issues. Knowing how to manage this process will increase your chances of making your acquisition a success.

Be Prepared to Start Early

Planning focused on identifying and retaining the critical human assets being acquired begins in the earliest phases of the due diligence process.

There will always be key people you want and need to keep in the target organization. The challenge is to first identify who they are, then to devise ways to make sure they stay on as enthusiastic, committed team members. It is important to recognize that, in spite of your best efforts, valued people may still seek other employment elsewhere. The importance of approaching these individuals quickly and communicating a clear vision of their long-term roles in the organization must be taken seriously.

Many times, management of the acquiring company makes staffing decisions prematurely without systematically determining who will fill what roles, what departments or corporate functions will be kept in place or dismantled, and the staffing needs for those various areas. Too often, management does not engage in the kind of extensive personnel-related due diligence necessary to strengthen the combined companies.

If started early, the retention process can pave the way for a smoother integration stage and your key human assets can serve as conduits for feedback from employees to the very top of your organization.

Align the Selection Process with Company Strategy

Before you can assess the human capital of another company you must first have a clear vision of the strategy of the newly formed company. Why did you acquire or merge with the company? Was it to acquire new technology resources, new product lines or an increased market share? Once you have a clear vision of the merger rationale and can effectively communicate it to your employees you can move forward in determining who the "must-keep" individuals are.

Along with a clear company vision, it is important to decide early what organization structure will work best for your company. Are you going to design a new structure, duplicate the structure of your organization or your target organization, or absorb the target company into your current structure? The latter may be the most obvious strategy but many times is just a temporary fix and valuable talent that could have played a critical role in moving the merged company forward will be lost.

Set the Groundwork for the Assessment of Key Personnel

The first step is to form a team to focus on the selection process. The team should be made up of key members of the due diligence team and managers from both companies who will be responsible for the combined company's post acquisition success. During the due diligence you should examine the processes, systems, structures, and interactions among managers and staff in all departments of the target company that support or impede business objectives. To build a truly high-performing organization, it is necessary to align the organization structure, business processes, people and culture with the overall company strategy and establish a clearly defined set of objectives for the company.

Including these objectives in your selection criteria will guide you through the process and allow the team to evaluate the factors that are most important in the selection of your staff. This selection process should be based on objective assessment of skills and competencies, not on political compromise. The process for appointments should be seen as fair and rational. It should also be timely, moving quickly to get the team in place and accelerate integration.

Be sure to communicate your guidelines and progress during this phase of the acquisition. If the selection process is conducted with fairness and integrity, then the combined firm will keep key staff, maintain higher morale and increase productivity.

Don't Forget to Reward and Motivate to Retain Key Employees

Rewarding employees for exceptional work they've done is critical to keeping them motivated to want to continue to do their best. There are many factors to consider when designing reward systems. In general, ensure that you are rewarding the desired behavior and understand whose performance you are rewarding (individual, team, company). Link rewards to short- and long-term integration results. This could be in the form of salary, retention bonuses, tickets to the theater, or a department lunch. The form of the reward is not as important as the gesture.

Many M&A specialists agree that a majority of mergers succeed or fail based on a company's ability to retain the people needed to attain the strategic objectives that are the foundation of the deal. Identifying those key human assets and devising retention strategies are the first steps that should be included in your acquisition strategy.

Julie Corbo is co-founder of EdgeStone Consulting, specializing in acquisition consulting and due diligence support to firms in the federal marketplace. For additional information, contact Julie Corbo @ jcorbo@edgestone.net, or review more detailed information at www.edgestone.net.

FGR offers analysis of a recent M&A transaction involving government technology services contractors. The analysis is written by Stuart McCutchan, president and CEO of InfoBase Publishers, Inc. © and editor of the Defense Mergers & Acquisitions, a premier source for information on defense/aerospace M&A. Opinions expressed below are those of InfoBase. All rights reserved. For more on InfoBase Publishers’ services, contact Bill Burton (410-820-6821, wkburton@infobasepub.c om) or click infobasepub.com.

Dynamics Research Corp. to Acquire the Government Division of Impact Innovations Group

Aug. 3, 2004 – Dynamics Research Corp. (DRC) (Andover, MA) signed a definitive agreement to acquire the government division of Impact Innovations Group LLC (Alpharetta, GA).

"Today's announcement demonstrates our commitment to growing both organically and through acquisition," said James Regan, DRC chairman and CEO. "Impact Innovations' government division meets our specific acquisition criteria, including financial performance and complementary business activities. It is a profitable organization generating about $47 million in annual revenues, approximately 60% of which are in the defense and intelligence arena, and it accelerates our presence and customer base in two of our identified strategic business areas: C4ISR and logistics. I am extremely pleased to welcome Impact's employees to DRC. They will be a great addition, strengthening DRC's capabilities and extending its market reach."

William C. Hoover, DRC president and chief operating officer, added, "The government division of Impact Innovations is a perfect fit with DRC. It enhances our CMM/level 3 software engineering core competency and enriches DRC's business intelligence, business transformation and network engineering & operations solution sets. It adds a number of key government defense and civilian customers to our portfolio. It also gives us a brand new and strategically important customer base in the intelligence community. In fact, Impact's roots extend to its founding in 1991 as an information technology (IT) services provider for the National Security Agency."

"Ellen Glover, president of Impact Innovations' government group, who will be joining DRC as a vice president and division manager, has impeccable credentials in the IT community," he added. "Ellen was the first woman from industry to receive the Federal Computer Week Eagle award in 2001, and she was recently elected Executive Vice Chair of the Industry Advisory Council. Under her leadership, Impact has built an excellent reputation with its customers. Additionally, Ellen has assembled an outstanding group of managers during her tenure at Impact. This team of highly talented professionals adds further to DRC's existing management depth. I am looking forward to working closely with Ellen and her key staff. The combined team will be very strong and formidable!"

Ellen Glover, president of Impact Innovations' government division, noted, "I'm thrilled to join the DRC organization and excited about the opportunities for Impact's employees. There is truly a strategic fit as well as similar cultural values. Additionally, the combined Impact/DRC organization will have about 600 employees in the greater Washington area, strengthening our visibility and marketing opportunities to the federal government."

TERMS

The cost of the acquisition is $53.4 million in cash.

The acquisition is expected to close within 30 days following shareholder and regulatory approvals and is contingent upon the closing of DRC's financing.

Impact Innovations' government group has about 365 employees in the United States. With offices in Columbia, MD, and Vienna, VA, Impact has approximately 325 employees in the Washington, DC, area. About 30% of its revenues stem from government intelligence agencies, 30% from various DoD agencies, and about one-third from federal civilian agencies, such as the FDIC, Dept. of Veteran's Affairs (VA), U.S. Postal Service (USPS), National Archives, and the Dept. of Justice.

ANALYSIS

With this deal, DRC sends a strong signal that it intends to fortify its position as a mid-tier integrator rather than be gobbled up by one of the government technology services sector's larger companies. During the past 18 months, the DRC name has been oft rumored as an acquisition target, but company president/COO Bill Hoover says he is not actively shopping the company and, to date, has not received any "serious offers."

What may have kept buyers away is DRC's profit performance (historically one of the lowest of all publicly-held federal IT companies), but this deal presumably adds real margin improvement. Better earnings potential may explain the rather robust price DRC paid for the property (1.14x announced revenues). Based on rough-order-of-magnitude estimates, and we mean "extremely" rough, Impact Government's EBITDA margin likely is in the neighborhood of 11%, which is much higher than DRC, as a whole, runs.

Nevertheless, the $53M acquisition continues the makeover of DRC by industry pros Hoover and CEO Jim Regan, and it is the company's largest to date, having previously picked up Andrulis Corp. for $26M in December 2002 and HJ Ford Associates, Inc., for $10M seven months earlier. If the deal is consumated, it will push DRC's annualized revenues over $300 million with more than 2,100 employees, and it marginally improves the company's ability to fulfill Hoover's stated goal of competing with the Northrop Grumman ITs, Titans, and CACIs of the federal services world (though in terms of size, DRC is only beginning to rival IT contractors such as SI International, DigitalNet, SRA, etc.).

On the surface, this merger appears to be a good functional match. Impact's enterprise content management, enterprise software, application development, IT service management, and INFOSEC capabilities fit nicely with Hoover's new "solutions- focused" organizational structure unveiled last month. In fact, Impact Government's three organizational elements will remain as stand-alone units that will be merged into DRC's Systems Engineering & Information Technology (SE&IT) led by Tom Kelly. Impact Government's Intelligence unit will be integrated into SE&IT's Systems Management organization, while the DoD and Civil units go to SE&IT's Systems Development organization. DRC has offered Impact Government's current president, Ellen Glover, the opportunity to lead the SE&IT Systems Development organization.

Impact Innovations' motivation for the sale is quite simple… its investors are ready to exit. The decision to sell its government unit now (when valuations for such businesses are at record highs) enables the company's founders to pay off the financiers and return to their commercial roots.

The origins of this deal date back to December 1999, when a health-care services company called Medaphis Corp. sold off a non-core government services business called Impact Innovations Group for $46.5M. The acquiring company was J3 Technology Services Corp. (now Impact Innovations), a purely commercial IT startup that was flush with cash from a 1998 investment by Cravey, Green & Wahlen, the largest private equity group in the Southeast. The J3 name subsequently was dropped in favor of the Impact Innovations handle.

Less than two years later, the commercial IT market was depressed, while post-9/11 demand in the government IT market was high. Impact Innovations had little choice but to concentrate on the latter until prospects improved for the former. Enter the aforementioned Ellen Glover, who, after a seven-year stint running Advanced Technology Systems, Inc. (ATS) (McLean, VA), was looking for a new challenge. She found one as president of Impact Government. In 2003, Glover oversaw a 17% increase and the company expects to record about $48.5 million in sales this year.

By the way, Impact's Commercial Division will subsequently be purchased by the current operating management team, retain the Impact Innovations brand, and its 335 employees will continue to provide IT consulting, staffing, and outsourcing services to Fortune 500 and middle-market commercial customers.

FGR presents briefs on selected technology services contracts awarded by the U.S. government to federal contractors during the last two months. The briefs are compiled by InfoBase Publishers, Inc.©, a leading provider of competitive intelligence for the worldwide defense/aerospace industry. All rights reserved. For more on InfoBase Publishers’ services, contact Bill Burton (410-820-6821), wkburton@infobasepub.com or click infobasepub.com.

Abacus Technology Wins 10-Year, $71M Contract for C4 Services at Kirtland AFB

The U.S. Air Force Material Command, 377th Contracting Squadron (AFMC 377 CONS) (Kirtland AFB, NM) awarded Abacus Technology Corp. (Chevy Chase, MD) a 10-year, $71 million, firm-fixed-price contract (number not yet assigned) to provide command, control, communications, computer (C4) services.

Under the contract, the company will perform the management, operation, maintenance and planning of communications, computer systems, multimedia services, and information management of the 377th Air Base Wing and support for approximately 200 associate units.

The contract, which will begin October 1, 2004, contains a one-year base (worth $7.1 million), three one-year options and three two-year award terms that, if earned could increase its total cumulative value to about $71 million and extend the period of performance through September 30, 2014. Total funds for the base year have been obligated at this time.

The procurement is considered a follow-on effort. The incumbent was Abacus Technology, which performed the work previously under a five-year, $18 million contract (F29650-00-C-0003) awarded in April 2000 following an 'A-76" cost-comparison. The study determined that Abacus could perform the work in a more cost-effective than continued government performance. The earlier contract's final option will not be exercised, because the contract ceiling has been reached.

Army Engineering & Support Center Inks Two More for Munitions Response

On June 9, 2004, the U.S. Army Corps of Engineers' Engineering and Support Center (Huntsville, AL) awarded two parallel, five-year, firm-fixed-price, IDIQ contracts for worldwide munitions response and other munitions-related services.

The recipients were:

— EOD Technology, Inc. (Lenior City, TN) (W912DY-04-D-0018).
— UXB International, Inc. (Ashburn, VA) (W912DY-04-D-0019).

Under the multiple-award program, these companies join seven others pre-qualified in April 2004 to compete for task orders to manage unexploded ordnance (UXO) projects at formerly used defense sites, active DoD installations, DoD Base Realignment and Closure (BRAC) sites, property adjoining DoD installations, and projects for other U.S. government agencies or foreign governments. About about 75% of the work is expected to be performed as part of the U.S. Army's Captured Enemy Ammunition mission in Iraq and possibly in other areas outside the United States. The Huntsville Center is a COE center of expertise for ordnance and explosives cleanup.

The contracts were competitively procured through solicitation W912DY-04-R-0003, which called for multiple awards under full & open competition. Half of the awards were set aside for small businesses only (NAICS 562910). A total of 63 offers were solicited and 15 were received.

The procurement is considered a follow-on to Huntsville Center's five-year, $200 million Ordnance and Explosives (OE) Response and Services program.

Army SMDC/ARSRAT Selects CAS, Colsa, Dynetics for SETA Support under SMDIS II Program

On June 22, 2004, the U.S. Army Space and Missile Defense Command, Army Strategic Command (SMDC/ ARSTRAT) (Peterson AFB, CO) awarded three parallel, five-year, cost-plus-fixed-fee, IDIQ contracts, worth $245 million collectively, for the Space and Missile Defense Initiatives Support II (SMDIS II) program.

The recipients were:

— CAS, Inc. (Huntsville, AL) (W91260-04-D -0001).
— COLSA Corp. (Huntsville, AL) (W91260-04-D -0002).
— Dynetics, Inc. (Huntsville, AL) (W91260-04-D -0003).

Under this multiple-award program, these three companies now will compete for task orders to provide scientific, engineering and technical assistance (SETA) services in support of SMDC/ARSTRAT, formerly known as the Army Space Command (ARSPACE), and other government agencies involved in the space, homeland defense, and missile defense arenas. Task orders will cover vision statements and doctrine; development of architectures; and the provision of program support (e.g., planning, development, fielding documentation, modeling and simulation, system analysis and integration, integrated logistics support, development of strategy, support to the warfighter, contingency and mission support, program oversight, independent verification validation and test evaluation, prototype development, sustainment and operation, and analysis of emerging technologies).

The contracts were competitively procured through solicitation W91260-04-R-0001, which was issued on March 4, 2004, and called for competition limited to small businesses only (NAICS 541710; 1,000 employees). A total of three offers were received.

ATR Only Bidder in SBSA Competition for NSWC R&D Contract

The U.S. Naval Surface Warfare Center, Indian Head Div. (NSWC-IHD) (Indian Head, MD) awarded Advanced Technology & Research Corp. (ATR) (Burtonsville, MD) a five-year, $15 million, cost-plus-fixed-fee, IDIQ contract (N00174-04-D-0012) for development and production of weapon and shipboard systems, weapons effects tests, submarine and surface ship survivability, warheads, energetic materials, and delivery systems.

Under the contract, the company will perform technical, engineering, and analytical support services in the program areas of Continuous Rod Warhead, Assault Breaching Systems, Thermobaric Warhead and Evolved Sea Sparrow. ATR will design/analyze and optimize projectiles, evaluate performance of explosives and other energetic materials. Work will be performed in Carderock, MD; Dalhgren, VA; and Indian Head, MD.

DISA Inks Incumbent Houston Associates in Recompete to Support AITS-JPO

On behalf of the U.S. Defense Information Systems Agency (DISA), the Defense Information Technology Contracting Organization - National Capital Region (DITCO-NCR) awarded Houston Associates, Inc. (HAI) (Arlington, VA) a seven-year, $70 million, performanced-based, cost-plus-fixed-fee contract (HC1047-04-C-4070) for coalition and advanced information technology (IT) integration and operations.

Under the contract, the company will support DISA's Advanced Information Technology Services - Joint Program Office (AITS-JPO), which facilitates the rapid transfer of advanced IT from the research and experimentation stage through pilot operations and deployment to full-scale implementation within the Defense Information Infrastructure (DII). The contract also provides support for the Defense Information System Network - Leading Edge Services (DISN-LES) asynchronous transfer mode (ATM) network.

The AITS-JPO is a cooperative effort of the Defense Advanced Research Projects Agency (DARPA); the Joint Staff Director for Command, Control, Communications, and Computers (JS/J6); and DISA.

The contract contains a one-year base, four one-year options, and two one-year award terms that, if earned, could increase its total cumulative value to $70 million and extend the period of performance through July 2011.

FBI Picks 10 Small Businesses for Technical Support and Development Project

The U.S. Federal Bureau of Investigation (FBI) (Washington, DC) awarded 10 parallel, five-year, IDIQ contracts, worth $42.5 million collectively, for the Technical Support and Development Project (TSDP).

The recipients were:

— AlphaInsight Corp.
— Comso, Inc.
— Data Computer Corp. of America
— Glotech, Inc.
— InfoPro, Inc.
— Innovative Management & Technology Approaches, Inc.
— Pragmatics, Inc. (McLean, VA)
— Project Performance Corp.
— Staffing Alternatives, Inc.
— McDonald Bradley, Inc. (MBI) (Herndon, VA).

Under the multiple-award program, these companies now will compete for task orders that cover various information technology (IT) support services, including information assurance (IA) and cyber security, configuration management (CM), technology policy and planning, maintenance and upgrades, Web integration and application development.

The contract was competitively procured through solicitation RFP-WH04001, which was issued on March 5, 2004, and called for multiple awards under competition limited to small businesses only (NAICS 541511). The FBI required that all contractors hold top secret security clearance. Proposals were due on April 16, 2004.

SWCCD Selects Seaward Services to Support T&E of Experimental Combat Watercraft

The U.S. Naval Surface Warfare Center, Carderock Div. (NSWCCD) (Bethesda, MD) awarded Seaward Services, Inc. (Dania Beach, FL) a five-year, $6.9 million, time- and-materials, IDIQ contract (N00167-04-D-0045) to provide services to support test and evaluation (T&E) of experimental boats, watercraft, and periodic high- speed boat rentals.

Under the contract, which has an estimated total level of effort (LOE) of 20,000 labor-hours, the company will provide boat operation services to support testing of experimental boats and watercraft, ranging from small inflatables to 100-ft. patrol craft, at numerous sites. Seaward Services also will provide services in support of military and emergency salvage and rescue operations, provide marine surveyor services, and develop formal early operation assessment test plans. The contract supports the Combat Craft Dept. (Code 23) of NSWCCD's Detachment Norfolk (NSWCCDDN), a full spectrum research, development, test and evaluation (RDT&E), engineering, logistics, and technical support center for all types of combatant craft, boats, and watercraft NSWCCDDN's customer base includes the U.S. Navy, the Special Operations Command (SOCOM), the U.S. Army, the U.S. Marine Corps, the U.S. Coast Guard, and the maritime community.

NSWCDD NAVSSES Names LPI to Support HM&E Systems on Navy Ships

The U.S. Naval Surface Warfare Center, Carderock Div., Naval Ship Systems Engineering Station (NSWCCD NAVSSES) (Philadelphia, PA) awarded LPI Technical Services, Inc. (Chesapeake, VA) a five-year, $52.5 million, cost-plus-fixed-fee, IDIQ contract (N65540-04-D-0022) for engineering and technical services in support of Hull, Mechanical, and Electrical (HM&E) systems on U.S. Navy vessels.

Under the contract, which has an estimated level of effort (LOE) of 179,200 labor-hours per year, the company will support NAVSSES in improving and maintaining fleet operational and material readiness of HM&E systems and equipment through assessment, development, implementation, and coordination of fleet maintenance technology processes.

Subcontractors likely include Q.E.D. Systems, Inc. (Virginia Beach, VA), LPI's mentor in the DoD's Mentor - Protégé program, and one of two prime contractors performing HM&E ship alterations (SHIPALTs) on U.S. Navy ships for NAVSSES.

The contract was competitively procured through solicitation N65540-03-R-0073, which was issued on July 24, 2003, and called for competition limited to 8(a) firms only (NAICS 336611). Only one offer was received.

SPAWAR Selects Computer & Hi-tech Management to Support non-DoD Agencies

The U.S. Naval SPAWAR Systems Center Charleston (SSC-C) (Charleston, SC) awarded Computer & Hi-tech Management, Inc. (Virginia Beach, VA) a four-year, $36.9 million, performance based, cost-plus-fixed-fee, IDIQ contract (N65236-04-D-7857) for system software and technical support.

Under the contract, the company will perform services that include activities involving analysis, design, development, installation, deployment, integration, operations, procurement, configuration management, logistics, maintenance and lifecycle support functions for various automated information systems. The services to be provided are in support of federal agencies in the Washington, DC, area. Approximately 90% of the work covered under this contract will be for non-DoD customers, such as Veteran's Administration, IRS, Secret Service, Coast Guard, and Library of Congress. Navy Tactical Systems and the Defense Communications Systems for the Naval Computer Telecommunications Area Master Stations sites are also covered under this contract.

USAF AAC Names TYBRIN to Support Aircraft Weapons Stores Compatibility

The U.S. Air Force Air Armament Center (AAC) (Eglin AFB, FL) awarded TYBRIN Corp. (Ft. Walton Beach, FL) a five-year, $25 million, firm-fixed-price, cost-plus- award-fee, IDIQ contract (FA9200-04-D-0002) for the Aircraft Compatibility Scientific & Engineering Support (ACSES) program.

Under the contract, the company will support the Air Force SEEK EAGLE Office (AFSEO) within the AAC's 46th Test Wing by developing maintaining, and exercising computer programs, testing, analysis, documenting results in oral and written form, and software configuration management for aircraft stores compatibility programs. TYBRIN will help AFSEO certify stores on piloted and non-piloted aircraft; develop specific scientific and engineering methodologies to meet the stores compatibility program; provide engineering analyses and management support to meet current needs; and develop tools necessary to ensure that stores are compatible with aircraft used in a multi-role combat environment.

The contract was competitively procured through solicitation FA9200-04-R-0002, which was issued on February 13, 2004, and called for competition limited to small businesses only (NAICS 541710; 1,500 employees).

The procurement is considered a follow-on effort. The incumbent was Avionics Test & Analysis Corp. (ATAC) (Niceville, FL), which performed the work previously under a five-year, $23 million contract (F08635-98-D -0029) awarded in June 1999.

USAF AETC Names NAA Services Corp. for O&M of Gila Bend AFAF, Goldwater Range

The U.S. Air Force Air Education and Training Command (AETC), 56th Contracting Squadron (56 CONS) (Luke AFB, AZ) awarded NAA Services Corp. (Chantilly, VA) a five-year, $56 million, firm-fixed- price, IDIQ contract (FA4887-04-D-0001) for operation and maintenance (O&M) services for Gila Bend Air Force Auxiliary Field (AFAF) and the support services required for operation of the Barry M. Goldwater Range, both in southern Arizona (near Luke AFB).

Under the contract, the company will perform services that include airfield manned range and meteorological, civil engineering, fire and emergency, security, logistics, lodging, air traffic control, custodial, trash and refuse, environmental engineering, range maintenance, biological and environmental monitoring and management, GSA vehicles, commercial vehicles, and infrastructure projects when/if approved. Gila Bend AFAF and the Goldwater range are government- owned, contractor-operated (GOCO) facilities used in support of training missions.

The contract, which begins October 1, 2004, contains a one-year base (worth $10.9 million) and four one-year options that, if exercised, could increase its total cumulative value to approximately $56 million and extend the period of performance through September 30, 2009. The Air Force can issue delivery orders totaling up to the maximum amount indicated above, although actual requirements may necessitate less. No funds have been obligated.

The contract was competitively procured through solicitation F02604-03-R-0041, which was issued on September 3, 2003, and called for competition limited to small businesses only (NAICS 561210). Though a bid protest filed earlier this year was denied by the GAO, the Air Force restarted the source-selection process and asked the remaining bidders to submit revised proposals, which resulted in award to NAA Services.

The procurement is considered a follow-on effort. The incumbent was Spectrum Sciences & Software, Inc. (Ft. Walton Beach, FL), teamed with Washington Group International, which performed the work previously under a five-year, $45 million contract (F02604-99-C- M001) awarded in May 1999. Interestingly, the incumbent ousted by Spectrum Sciences was none other than NAA Services, which performed the work under a five-year, $28 million contract (F02604-94-C -0001).

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